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Investment opportunities in Bangladesh
Goldman Sachs expects that, within the next 50 years, 5 of the G-7 nations will be replaced by
emerging economies. Many of these economies have large population, cheap labor and high
levels of productivity. The Bangladeshi economy possesses these characteristics, leading
Goldman Sachs to include the country in its list of “The Next Eleven (or N-11)” - economies that
are expected to have a high potential for driving the global growth in the 21st century. Similarly,
Citi Group has also included Bangladesh in its list of 3G (Global Growth Generator) countries.
Given the immense potentials of Bangladesh, there has been a lot of interest on this small
economy, as a new destination for foreign investments (both direct and portfolio). On the
backdrop of the Middle East crisis, which made many emerging market funds somewhat
reluctant about investing there, this interest is likely to increase further very soon. One question
that arises for foreign investors is how correlated Bangladesh is with the global economy. This
report, aims to find to what extent such correlations exist (in terms of the economy and capital
markets), where the major exposure of the country are, and whether foreign investments would
benefit from diversification.
The Macro Economy
Stable growth, very little correlation with the global economy: Bangladesh has experienced
very stable economic growth over the last decade. Figure 1 compares the GDP growth rate of
Bangladesh with the world, the USA (a proxy for the developed economies), and Vietnam and
Pakistan (which are taken as proxy for other N-11 countries). We find that over a period of 10
years (2001 to 2010), Bangladesh has maintained a more or less stable growth rate, much higher
than those of advanced economies. Moreover, GDP growth of Pakistan and Vietnam, though in
some cases higher than Bangladesh, has fluctuated quite a bit.
Figure 2 shows a five year moving correlation of the growth rate of the world economy and
Bangladesh over a period of 26 years (1984 to 2010). We start tracking data after the 1980s to
remove the effect of any structural changes that may have been brought on by the country’s
independence in 1971. The figure shows that the moving correlation varied from strongly
positive to negative over the period concerned. What is interesting is that the correlation
decreases, or in some cases becomes negative in times when the US economy goes through a
recession. For instance, the US economy experienced a recession in the early 1990s (July 1990 –
March 1991), due to the oil price shock and S&L crisis. At that time, we find a very strong
negative correlation between the global economy and Bangladesh. Similarly, during the early
2000s the US economy went into another recession following the “Dotcom crash” and the 9/11
attack. During this session again, we see the moving correlation for Bangladesh to be declining.
Finally, we see that during the most recent financial crisis of 2008, the moving correlation
dipped down from 0.96 to 0.37.
One important issue that must be noted however is that over time, there has been a more or less
upward trend in the moving correlations, signifying that the Bangladeshi economy is becoming
more and more linked with movements of the global economy, as linkages increase.
Inflation under control, but dictated by global food prices: We compare the inflation rate of
Bangladesh with that of the United States and the two comparable economies – Vietnam and
Pakistan (Figure 3). We see that all four economies follow similar trends in inflation, even
though the rate for Bangladesh has not fluctuated as much as that of Vietnam and Pakistan.
Inflation rate peaked in 2008, prior to the global financial crisis, with rates reaching to about
10% in Bangladesh, while it soared to 23.1% and 20.3% in Vietnam and Pakistan, respectively.
On average, inflation rates in these two economies have also been higher than that of Bangladesh
Inflation in Bangladesh is mostly driven by food prices, given the large weight of food in CPI
calculations. Our earlier report on “Inflation in Bangladesh: Driven by global phenomena” found
that much of the food price increase can be attributed to global food price hikes. Figure 4 shows
food inflation trends in Bangladesh along with the World Food Index (WFI) of the Food and
Agriculture Organization (FAO). We see that on average food inflation in Bangladesh follows
the trend in global food prices quite closely, signifying that the country still has large exposure to
global economy in this regard.
Capital Markets
High returns, low correlation with global markets - diversification benefits possible:
We use data for a little more than 10 years (January 2001 to March 2011) to show how correlated
the Bangladeshi capital market is with the rest of the world. We compare the S&P 500 index (to
see stock market performance of the United States) and MSCI World Index (as a proxy for
global stock performance) with our own BRAC EPL Index (BEPL) over the mentioned time
period. We also compare BEPL with the MSCI Emerging Market Index (MXEF). The reason for
using BEPL rather than our benchmark index DSE General Index (DGEN) is that we believe that
there are discrepancies in the calculation methodology of DGEN. Hence, the DGEN returns are
likely to be more suppressed than actual returns experienced.
Figure 9 shows how returns from the S&P 500, MSCI World Index and MXEF compare with
returns from BEPL. The figure shows values of the said indices in rebased form for comparisons.
Please note that the axes for S&P 500, MSC World Index and MXEF are different from that of
BEPL (which is shown on the right-hand axis). It can be understood from the figure that the
Bangladeshi stock market has given returns substantially greater than the S&P 500 and the world
as a whole, even if the eventual correction in December was also quite enormous. Returns from
emerging markets were also high in spite of the correction in 2008 due to the global financial
crisis. It should be noted that while all three indices (MSCI World, S&P 500 and MXEF) faced
severe corrections during the financial crisis, no effects were be observed in the Bangladeshi
market.
In order to provide a more in-depth analysis of market movements, we calculate a 5 year moving
correlation of BEPL monthly returns with that of the other three mentioned indices. Figure 10
shows moving correlation of BEPL returns with the S&P 500 and MSCI World returns. We find
that overall, the correlation reverts to zero (for both indices), even if in recent times (following
the 2008 crisis) the correlation has largely been negative. Finally, figure 11 shows the 5 year
moving correlation for monthly returns of BEPL and MXEF. The correlation trend here is
strikingly similar to that of figure 10.
In conclusion, we provide the following table to show how returns from the Bangladeshi capital
market compares with the MSCI World Index, S&P 500 and MSCI Emerging Markets Index:
We believe that Bangladesh offers unique opportunity to global investors in terms of return
enhancement and risk mitigation. With robust growth outlook and younger listed corporations,
equity returns are very promising. At the same time, semi-segmented Bangladesh economy and
capital market will lower the volatility of globally invested portfolios.
Bangladesh’s Leather Industry
Leather industry is an old manufacturing sub-sector in Bangladesh with a long heritage of over
five decades. This is an agro based bi-product industry integrated with locally available
indigenous raw materials (hides and skins) having tremendous potentials for export development
and sustained growth along a considerably long duration of time length.
Sub-segments of this industry are -
1. Finished Leather
2. Leather Goods
Sector Highlights:
1. The labor-intensive leather industry is well suited to Bangladesh having cheap and
abundant labor.
2. Bangladesh has a domestic supply of good quality raw material, as hides and skins are
a by-product of large livestock industry.
3. Adequate government support in the form of tax holidays, duty free imports of raw
materials and machinery for export-oriented leather market
4. The industry lacks domestic technology and expertise and local support industries such
as chemicals are still under-developed.
Investment Incentive:
1. Present Government is in the process of setting up of separate Leather Zone relocating
the existing industry sites to an well-organized place.
2. New FDI inflow is highly encouraged and foreign investors are welcome to have the
opportunity.
Leather industry is a vital component of Bangladesh economy in terms of foreign exchange
earnings since it is the third highest foreign exchange earner after RMG and frozen food. The
industry is generally export based. More than 80% of leather and leather products of Bangladesh
are marketed abroad, mostly in the form of crushed leather, finished leather, leather garments,
and footwear. More than 200 modern tannery units are now in operation in the industry. With the
exception of a few tanneries located in Chittagong and other places of the country, tanneries
located mostly in the Hazaribagh area of Dhaka city. The country's share in the world leather
market is still very insignificant with a share of 0.36% of world leather trade in 2004. An
important characteristic of the leather industry in Bangladesh is its rather poor domestic demand.
This promising sector is suffering from a host of problems including problems related to
management and infusion of advanced technology and innovative and integrative marketing
strategy. Issues related to concerns for the environment generated by the tanneries and health and
hygiene factors for both the tannery workers and the people living nearby continue to haunt the
image and operational efficiency of the sector.
Industry Profile
The leather industry in Bangladesh is well established and is an important foreign exchange
earner. The industry is entirely in the private sector which has proved to be fully capable of
handling it. Out of the total 207 tanneries of Bangladesh, 186 are located haphazardly in
Hazaribagh area in Dhaka where 84 per cent of the total supply of hides and skins are processed
in a highly congested area of only 70 acres of land. The unplanned tanneries at Hazaribagh do
not have supporting infrastructure facilities. No tannery in the area has effluent treatment
facilities, posing a grave threat to environment. The industry, however, is in the process of
shifting to Savar in consideration of the pollution it cast upon the Dhaka City and because of an
acute lack of space for expansion and modernization.
Over 50 manufacturers are producing various leather items such as footwear, travel goods,
suitcases, briefcases, fashion accessories, belts, wallets, hand bags, case holders etc. for overseas
export. Most of the small tanneries are family owned and operated as cottage type industries.
Many of them are established as proprietorship or partnership. The larger tanneries are basically
public or private limited companies. Only a few tanneries have proper accounting practices and
financial controls in place to define their profitability and financial condition.
The principal raw materials for this industry are cowhides and goat skin. The annual domestic
supply of hides and skins is around 200 million square feet, consisting of 63.98% Cowhides,
32.74% goat skin, 1.09% Sheep skin and 2.219% buffalo hides. Local Consumption of leather is
around one fifth of the total output and the rest 80% is exported in the form of Crust leather
(75%), and finished leather (20%), Footwear and leather goods (5%). Though there has been
some appreciable improvement in animal husbandry and butcher's techniques in Bangladesh in
recent times, it may take quite some time to reach the international standard. The Black Bengal
and other variants of goat skin from Bangladesh enjoy an excellent reputation for quality
worldwide. At present, the leather sector accounts for 3-4 per cent of total export earnings.
According to Bangladesh Export Promotion Bureau (EPB), contribution of leather sector to total
GDP was 0.32% in 2005.
At present leather and leather products are exported to about 53 countries of the world. The
major importing countries are: Italy, Brazil, Germany, Singapore, China and the USA. EPB
sources report that export earning from leather goods was US$ 287.78 million in 2004-2005, out
of which, about 80% are from leather and the rest is from finished leather goods. Figure-2
exhibits that the export growth rate of Bangladesh leather sector declined initially in the year
1998-1999 because there was economic recession in Bangladesh due to massive flood. During
this period (from 1998 to 2005), the growth rate was highest in 2000-2001 (16.32%). In the year
2002-2003 export growth rate was negative because of the global economic recession as a
consequence of the War in Iraq, the Twin Tower (9/11) incident, rise of international terrorism,
fundamentalist orientations, etc. Export growth rate for the year 2004-2005 was 8.22%. Foreign
investment to the industrial leather sector of Bangladesh has been very limited. Till March 2003,
the total foreign investment in the industrial leather sector was $136.12 million, which is only
1.33 per cent of the total foreign direct investment into the country.
This sector is also a major employer of semi-skilled workers, which is a vital step towards
alleviating unemployment. Information obtained from a number of credible sources exhibits that
in total (accumulated) 741,000 people are employed directly or indirectly in leather and its sub-
sectors. 200,000 people are involved in raw hide collection and supply and 50,000 are working in
tanning industry. About 300,000 workers are associated with retailing of leather. Currently it is
estimated that about 150,000 persons are employed in the footwear industry, 30,000 persons are
in leather goods industry and another 8000 persons are involved in exporting of leather and by
product processing. (Source: BCLT, LSBPC, ILO, BBS, GTZ, RSMA and ITC-ATF) Despite
having a great potential for growth, the net results of development efforts undertaken for the
leather export sector of Bangladesh have been far from impressive due to the poor quality of
processing, illegal export to India, poor technological base, inadequate financing, low value
addition, lack of marketing skill, incorrect planning and improper implementation.
Industry Life Cycle: Growth Potential
The leather industry with over Taka 160 billion annual export earnings is the country’s third
biggest foreign exchange earner after the RMG and the frozen food sectors. Local and foreign
experts believe that this sector could replicate the successes of the Readymade Garment (RMG)
sector if the government and genuine entrepreneurs join hands for effective cooperation and
develop the sector with a comprehensive strategic plan. Leather industry is growing all over the
world – both in market potentials and in installed capacity. For Bangladesh, export earning only
from leather was US$ 207 million in 2001- 2002 and it is expected to reach US$ 235 million in
2005-2006 as the demand for quality raw material for finished leather goods is increasing in
developed countries. The size of the global footwear market is enormous as well. A thorough
analysis of the historic data shows that factors like demographic composition, depth and reach of
urbanization and distribution of wealth have consistently shaped the growth of the footwear
industry. Though till now Bangladesh has shown poor performance in the leather goods sector, it
has a good growth potential if entrepreneurs can avail modern technology to diversify their
products and designs according to international market trends and apply modern tools for
marketing & promotion.
Realizing this sector’s growth potential, Bangladesh Government has reiterated its decision to
treat the industry as one of the thrust sectors and reduce interest rates for industrial credit to this
sector to seven percent (7%). The government has decided to develop a leather industrial area at
Savar, outside Dhaka where tanneries from Dhaka would be shifted to free the Hazaribagh area
and the river Buriganga in general, where most of the tanneries are concentrated, of pollution.
About 200 leather units would be re- located at the new site with modern waste-treatment plants
to create a healthy environment. Presently, many of the advanced communities consider
Bangladesh as a worthwhile investment destination due primarily to: (i) an abundance of a
marked low-wage labour force, and (ii) the existence of export processing zones and facilities
including incentives like tax holidays for 10 years. A report of Japan-Bangladesh Business
Associations including Japanese Commerce and Industry Association (SHOO-KOO-KAI) shows
in clear terms that remarkable economic development and concentration of massive FDI within a
short period of time in China, increasing labour costs in Thailand, and inadequate domestic
market for high-income groups in Vietnam, is leading Japan to think of investing more in
Bangladesh, particularly in area like leather. Also about 10% of the total population of
Bangladesh (14 million) is recognized to have an income level comparable to that of their rich
country counterparts. Assuming that two pairs of footwear are purchased by a person in this
group, the demand for footwear would be 20 million pairs per year. Hence, there is a large latent
domestic market for quality footwear and other leather goods in Bangladesh as well.
SWOT Analysis
The SWOT Analysis presented above along with the existing & projection of demand trend
of Bangladesh leather sector (section 3.4) and the growth potential of Bangladesh’s leather
sector (section 3.6) give us a strong signal that the leather sector in Bangladesh has all the
basic elements for a sustainable rate of growth in the future. What is essential now is to
prepare and adopt strategic plan, set organizational structures in government and industry to
implement their plan and evaluate the achievements in the light of emerging markets and
technological factors and revise the strategic plan accordingly for the next five to ten years.
The EPB made forecast of export growth targets of less than 4% per year is too pessimistic
for this sector. Bangladesh should forecast to attain a 5-7% growth in export earnings from
leather sector and combine necessary acts together for that purpose
Capital Markets Composition
Year APEX ADELCHI FOOTWEAR LTD APEX TANNERY BATA SHOE
Basic
EPS
NAV per
Share
Net Profit
After Tax
(mn)
Year
End P/E
%
Dividend
Basic
EPS
NAV per
Share
Net
Profit
After Tax
(mn)
Year End
P/E
%
Divide
nd
Basic
EPS
NAV
per
Share
Net
Profit
After
Tax
(mn)
Y
e
ar
E
n
d
P/
E
%
Di
vi
d
e
n
d
2000 13.72 213.76 10.29 14.55 12.00 -9.48 176.76 -14.44 -15.72 12.00
2001 10.61 214.37 7.96 19.72 10.00 16.01 151.39 24.41 10.57 12.00
2002 10.96 215.33 8.22 19.53 10.00 16.65 170.88 25.37 12.61 15.00
2003 18.83 218.75 14.12 12.87 14.00 14.74 394.82 22.47 14.24 12.00
2004 57.43 254.18 43.07 9.11 20.00 11.39 392.65 17.35 29.86 12.00
2005 60.60 292.78 45.45 5.92 22.00 21.30 400.95 32.47 10.51 13.00
2006 66.55 334.33 49.92 6.99 25.00 28.07 412.49 42.78 8.91 15.00
2007 225.81 535.15 169.36 9.61 25.00,
50%B
17.56 430.05 26.76 16.99 17.00
2008 168.74 500.39 189.83 14.13 30.00 16.21 429.26 24.70 82.13 17.00
2009 188.03 653.42 211.53 13.74 35.00 98.18 510.44 149.63 12.48 21.00
2010 202.87 645.39 228.2320.27 40.00 93.74 562.52 142.85 15.82 25.00
2011 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a